Since February, the Shanghai government compensates investment firms for losses incurred while investing in early stage and seed funded tech startups. Goal is to encourage local entrepreneurship, especially those that bring “global impact” and “innovation” to the tech industry in China.
The Shanghai Science and Technology Committee (STCSM), together with the city’s finance bureau and its development and reform commission announced to compensate as much as 60% of any actual losses suffered from seed investments in technology start-ups in Shanghai. By mitigating the financial risk of investing in startups, the Shanghai government aims at accelerating the transformation of Shanghai as an innovation center in the world, and is consistent with the central government’s call to drive innovation in China.
The new policy promises up to 3 million RMB (around €421,000 EURO) per unsuccessful investment, with a limit of 6 million RMB (around €842,000 EURO) per investment firm per year. The amount of “risk compensation” allocated is calculated using the difference between the profit made from the startup’s exit and the amount of money invested in the startup.
For early-stage investment losses, the compensation is limited to 30% of actual losses, which is to be effective for two years initially. Only institutions focused on making angel investments and those investments made after January 1, 2015 in technology start-ups in Shanghai are qualified to apply for compensations.
The Shanghai rules said the capital for payouts will come from the city’s public finance bureau, which co-authored the regulation. Whether to approve a venture capitalist investor’s request will be reviewed and decided by a committee.
The plan has been criticized by professional investors as violating market principles and filled with loopholes. “A fundamental principle of the market economy is the match between risk and return,” Andrew Y. Yan, managing partner of private equity investment firm SAIF Partners, said. “Venture capitalist investments are extremely risky and limited to only a very few people and institutions. The negative consequences of using public money to compensate investment losses will be unimaginable.”
The Shanghai government is not the first provincial government in China to implement such a policy. In 2013, the Jiangsu government announced a fund, which also offered “risk compensation” to investors who invested in early stage tech startups.
In addition to financial incentives, provincial governments have also implemented policies to improve their local talent pool for startups. For example, in September 2015, the Shanghai government announced a new policy that would make it easier for tech entrepreneurs in Shanghai to obtain the very popular Shanghai hukou or permanent residence.
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